In BOC Policy Decision Next Week, How Will New Chief Poloz Play It?

New Bank of Canada Governor Stephen Poloz has to decide how aggressive he wants to be — if at all — in his first policy decision next week.

Mr. Poloz will be guided by the bank’s outlook on growth and inflation in the quarterly Monetary Policy Report, which will be published together with the rate statement on July 17.

So what can we expect from Mr. Poloz?

He may drop the rate hike signal that’s made Canada’s central bank an exception among Group of Seven nations, or he could provide more explicit forward guidance. Such a move would be a sure sign he wants to make his own mark and step out of the shadow of his famous predecessor Mark Carney, who now heads the Bank of England.

As the economy slowed in the second half of last year, Mr. Carney maintained the hawkish bias he first introduced in April 2012 and later watered down, in a warning to Canadians not to pile on debt. That supplemented Ottawa’s move to tighten mortgage insurance rules in a bid to rein in household debt and cool the housing market.

David Madani, an economist with Capital Economics who used to work at the central bank, is among a minority who has long argued the bias should be dropped. Now he believes it would be even better for Mr. Poloz to give additional forward guidance that makes it clear rate hikes are far off, saying rising bond yields in recent weeks risk jeopardizing the fragile economy recovery.

Mr. Madani calls the bank’s current language – which states the overnight rate of 1% is likely appropriate “for a period of time” — vague, saying it’s “almost not guidance”.

Mr. Poloz could make his mark next week in a more nuanced way, another economist says. Michael Gregory, a senior economist at BMO Capital Markets, says he could keep the bias, but add more emphasis on price stability because inflation has languished far below the 2% target.

The Bank’s second quarter survey of businesses found that a record 64% of firms expect prices to stay in the lower half of the 1-3% target range. An inflation-targeting central bank typically cuts rates to provide stimulus when inflation is below target. It hikes rates to rein in inflation if prices stray above target.

“He would want to put his stamp on the Bank, even if it’s very subtle,” Mr. Gregory said.

Mr. Poloz could also bide his time to see how economic data play out before making any significant policy move, a course of action other economists expect.

“I think it’s going to be very much status quo,” said CIBC World Markets chief economist Avery Shenfeld.

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